Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our consolidated financial position, results of operations and cash flows. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes.

The following discussion and certain other sections of this Report contain statements that reflect our views about our future performance and constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "outlook," "believe," "anticipate," "appear," "may," "will," "should," "intend," "plan," "estimate," "expect," "assume," "seek," "forecast," and similar references to future periods. Our views about future performance involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements. We caution you against relying on any of these forward-looking statements.

In addition to the various factors included in the "Executive Level Overview," "Critical Accounting Policies and Estimates" and "Outlook for the Company" sections, our future performance may be affected by the levels of residential repair and remodel activity, and to a lesser extent, new home construction, our ability to maintain our strong brands and reputation and to develop innovative products, our ability to maintain our competitive position in our industries, our reliance on key customers, the length and severity of the ongoing COVID-19 pandemic, including its impact on domestic and international economic activity, consumer confidence, our production capabilities, our employees and our supply chain, the cost and availability of materials and the imposition of tariffs, our dependence on third-party suppliers, risks associated with our international operations and global strategies, our ability to achieve the anticipated benefits of our strategic initiatives, our ability to successfully execute our acquisition strategy and integrate businesses that we have and may acquire, our ability to attract, develop and retain talented and diverse personnel, risks associated with our reliance on information systems and technology, and our ability to achieve the anticipated benefits from our investments in new technology. These and other factors are discussed in detail in Item 1A. "Risk Factors" of this Report. Any forward-looking statement made by us speaks only as of the date on which it was made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise.

Executive Level Overview

We design, manufacture and distribute branded home improvement and building products. These products are sold primarily for repair and remodeling activity and, to a lesser extent, new home construction. We sell our products through home center retailers, online retailers, wholesalers and distributors, mass merchandisers, hardware stores, direct to the consumer and homebuilders.

2020 Results

Net sales were positively impacted by increased sales volume across our two segments. Such increases were partially offset by unfavorable net selling prices in our Decorative Architectural Products segment.

Our Plumbing Products segment operating profit was positively impacted by cost saving initiatives, including actions taken to mitigate the COVID-19 pandemic impact, and higher sales volume. These positive impacts were partially offset by increased commodity costs, including tariffs, and an increase in other expenses (such as salaries and legal costs). Our Decorative Architectural Products segment operating profit benefited primarily from higher sales volume mostly due to paints and other coating products, as well as cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact. Additionally, operating profit was positively impacted by the non-recurrence of a 2019 non-cash impairment charge related to an other indefinite-lived intangible asset for a trademark associated with lighting products. These positive impacts were partially offset by unfavorable net selling prices, higher fixed expenses in our lighting business, and an increase in other expenses (such as salaries, legal costs, and advertising).

COVID-19 Impact and Response

During 2020, certain aspects of our businesses were adversely affected by the COVID-19 pandemic. Many, but not all, of our businesses remained operating in 2020 because the products we provide are critical to infrastructure sectors and the day-to-day operations of homes and businesses in our communities as defined by applicable local orders. However, some of our facilities experienced reduced capacity due to social distancing requirements and/or full closures ranging from a few days to 6-8 weeks, and if certain governmental orders are reimposed or if we are required to close a facility for employee safety reasons, we could experience new or extended closures which might adversely impact our ability to produce and distribute our products. Operational activity that was previously slowed at certain of our facilities, as a result of the pandemic and governmental orders, largely resumed operations at normal capacities by the third quarter of 2020 enabling them to progress on the fulfillment of production backlogs that developed in the first half of the year as well as to meet current consumer demand. Finally, we may experience supply chain disruptions, particularly disruptions related to our ability to source plumbing, lighting and builders’ hardware products.

Given our portfolio of lower ticket, repair and remodel-oriented product and the increased demand for repair and remodel spending, we experienced strong consumer demand in 2020. These levels of demand may or may not continue and we may experience an adverse impact in our 2021 results due to economic contraction as a result of continued high unemployment levels and remaining or potential renewed shelter-in-place and social distancing orders. The COVID-19 pandemic and the mitigating measures taken by many countries have adversely impacted and could in the future materially adversely impact the Company’s business, results of operations and financial condition.

During 2020, we implemented mitigating efforts to manage operating spend and preserve cash and liquidity including the temporary suspension of our share repurchase activity beginning in the second quarter of 2020, which we resumed in the fourth quarter of 2020. Currently, we have not identified, and will continue to monitor for, any substantive risk attributable to customer credit and have not experienced a significant impact from permanent store closures or retail bankruptcies.

We continue to be committed to the safety and well-being of our employees during this time, and, led by our cross-functional Infectious Illness Response Team, we have employed best practices and followed guidance from the World Health Organization and the Centers for Disease Control and Prevention. We have implemented and are continuing to implement alternative work arrangements to support the health and safety of our employees, including working remotely and avoiding large gatherings. In addition, we have modified work areas and workstations to provide protective measures for employees, are staggering shifts, requiring the use of face coverings, practicing social distancing and increasing the cleaning of our facilities, and in the event that we learn of an employee testing positive for COVID-19, we are completing contact tracing and requiring impacted employees to self-quarantine.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make certain estimates and assumptions that affect or could have affected the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based upon historical experience, as well as current economic conditions and various other factors (including the anticipated impact of the COVID-19 pandemic) that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities and related disclosures, and future revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.

Note A to the consolidated financial statements includes our accounting policies, estimates and methods used in the preparation of our consolidated financial statements.

We believe that the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition and Receivables

We recognize revenue as control of our products is transferred to our customers, which is generally at the time of shipment or upon delivery based on the contractual terms with our customers. We provide customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period.

We monitor our exposure for credit losses on customer receivable balances and the credit worthiness of customers on an on-going basis and maintain allowances for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. Allowances are estimated based upon specific customer balances, where a risk of loss has been identified, and also include a provision for losses based upon historical collection and write-off activity as well as reasonable and supportable forecast information that considers macro-economic factors and industry-specific trends associated with our businesses, among others. A separate allowance is recorded for customer incentive rebates and is generally based upon sales activity.

Goodwill and Other Intangible Assets

We record the excess of purchase cost over the fair value of net tangible assets of acquired companies as goodwill or other identifiable intangible assets. In the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, we complete the impairment testing of goodwill utilizing a discounted cash flow method. We selected the discounted cash flow methodology because we believe that it is comparable to what would be used by market participants. We have defined our reporting units and completed the impairment testing of goodwill at the operating segment level.

Determining market values using a discounted cash flow method requires us to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. Our judgments are based upon historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated five-year forecasts for sales and operating profits, and, currently, a two percent to three percent long-term assumed annual growth rate of cash flows for periods after the five-year forecast. We generally develop these forecasts based upon, among other things, recent sales data for existing products, planned timing of new product launches, estimated repair and remodel activity and, to a lesser extent, estimated housing starts. Our assumptions included U.S. Gross Domestic Product growing at approximately 4.2 percent in 2021 and develop into a relatively stable 2.8 percent each year thereafter, and a eurozone Gross Domestic Product growing at approximately 5.2 percent in 2021 and developing into a relatively stable 2.2 percent per annum over the five-year forecast.

We utilize our weighted average cost of capital of approximately 8.0 percent as the basis to determine the discount rate to apply to the estimated future cash flows. Our weighted average cost of capital in 2020 was consistent with 2019. In 2020, based upon our assessment of the risks impacting each of our businesses, we applied a risk premium to increase the discount rate to a range of 10.0 percent to 12.0 percent for our reporting units.

If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized to the extent that a reporting unit's recorded carrying value exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.

In the fourth quarter of 2020, we estimated that future discounted cash flows projected for all of our reporting units were greater than the carrying values. Accordingly, we did not recognize any impairment charges for goodwill. A 10 percent decrease in the estimated fair value of our reporting units would have resulted in a $6 million impairment to one of our reporting units.

We review our other indefinite-lived intangible assets for impairment annually, in the fourth quarter, or as events occur or circumstances change that indicate the assets may be impaired without regard to the business unit. Potential impairment is identified by comparing the fair value of an other indefinite-lived intangible asset to its carrying value. We utilize a relief-from-royalty model to estimate the fair value of other indefinite-lived intangible assets. We consider the implications of both external (e.g., market growth, competition and local economic conditions) and internal (e.g., product sales and expected product growth) factors and their potential impact on cash flows related to the intangible asset in both the near- and long-term. We also consider the profitability of the business, among other factors, to determine the royalty rate for use in the impairment assessment.

We utilize our weighted average cost of capital of approximately 8.0 percent as the basis to determine the discount rate to apply to the estimated future cash flows. In 2020, based upon our assessment of the risks impacting each of our businesses and the nature of the trade name, we applied a risk premium to increase the discount rate to a range of 11.0 percent to 12.5 percent for our other indefinite-lived intangible assets.

In the fourth quarter of 2020, we estimated that future discounted cash flows projected for our other indefinite-lived intangible assets were greater than the carrying values. Accordingly, we did not recognize any impairment charges for other indefinite-lived intangible assets. A 10 percent decrease in the estimated fair value of our other indefinite-lived intangible assets would have resulted in a $3 million impairment for one of our trade names.

Employee Retirement Plans

As of January 1, 2010, substantially all our domestic and foreign qualified and domestic non-qualified defined-benefit pension plans were frozen to future benefit accruals.

Accounting for defined-benefit pension plans involves estimating the cost of benefits to be provided in the future, based upon vested years of service, and attributing those costs over the time period each employee works. We develop our pension costs and obligations from actuarial valuations. Inherent in these valuations are key assumptions regarding expected return on plan assets, mortality rates and discount rates for obligations and expenses. We consider current market conditions, including changes in interest rates, in selecting these assumptions. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in different reported pension costs and obligations within our consolidated financial statements.

In December 2019, our Board of Directors approved the termination of our qualified domestic defined-benefit pension plans. As a result of this decision, the projected benefit obligations for these plans were increased to reflect the incremental costs to terminate the plans. Upon termination in 2021, we expect to recognize from accumulated other comprehensive loss approximately $450 million of pre-tax actuarial losses and approximately $95 million of income tax benefit, which includes approximately $11 million of tax expense from the elimination of a disproportionate tax effect.

In December 2020, our discount rate for obligations decreased to a weighted average of 1.7 percent from 2.5 percent. The discount rate for obligations is based primarily upon the expected duration of each defined-benefit pension plan's liabilities matched to the December 31, 2020 Willis Towers Watson Rate Link Curve. For our qualified domestic defined-benefit pension plans, the projected benefit obligations include the estimated incremental cost related to the termination. For these plans, the discount rate was then set equal to the discount rate that results in the same projected benefit obligation resulting from the normal projected benefit obligation calculation plus the estimated incremental cost to terminate. The discount rates we use for our defined-benefit pension plans ranged from 0.7 percent to 2.1 percent, with the most significant portion of the liabilities having a discount rate for obligations of 1.6 percent or higher. Due to the anticipated termination of our qualified domestic defined-benefit pension plans and the related plan assets comprised mostly of fixed income and cash, the assumed asset return for these assets was 2.0 percent.

The net underfunded amount for our qualified defined-benefit pension plans, which is the difference between the projected benefit obligation and plan assets, increased to $255 million at December 31, 2020 from $254 million at December 31, 2019. Our projected benefit obligation for our unfunded, non-qualified, defined-benefit pension plans increased to $162 million at December 31, 2020 from $161 million at December 31, 2019. These unfunded plans are not subject to the funding requirements of the Pension Protection Act of 2006. In accordance with the Pension Protection Act, the Adjusted Funding Target Attainment Percentage for the various defined-benefit pension plans ranges from 113 percent to 117 percent.

The increase in our qualified defined-benefit pension plan projected benefit obligation was primarily impacted by a decrease in the discount rate. During 2020, we contributed $57 million to our qualified defined-benefit pension plans, and our qualified defined-benefit pension plan assets had a positive return of 9.7 percent. Refer to Note N to the consolidated financial statements for additional information.

We expect pension expense for our qualified defined-benefit pension plans to be $470 million in 2021 compared with $30 million in 2020. The expected increase in pension expense is due to the anticipated termination of our qualified domestic defined-benefit pension plans and the recognition of losses currently reported in accumulated other comprehensive loss. If we assumed that the future return on plan assets was 50 basis points lower than the assumed asset return and the discount rate decreased by 50 basis points, the 2021 pension expense would increase by $60 million. Assuming a 0 percent asset return for our qualified domestic defined-benefit pension plans, projected 2021 total qualified defined-benefit pension plan expenses are expected to be approximately $474 million. We expect pension expense for our non-qualified defined-benefit pension plans to be $6 million in 2021, compared to $8 million recognized in 2020.

Consistent with our plan to terminate the qualified domestic defined-benefit pension plans, we currently anticipate contributing approximately $140 million in 2021. Refer to Note N to the consolidated financial statements for further information regarding the funding of our plans.

Income Taxes

Deferred taxes are recognized based on the future tax consequences of differences between the financial statement carrying value of assets and liabilities and their respective tax basis. The future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax-planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period and projected future taxable income.

If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company's three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable, and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of the deferred tax assets.

We maintain a valuation allowance on certain state and foreign deferred tax assets as of December 31, 2020. Should we determine that we would not be able to realize our remaining deferred tax assets in these jurisdictions in the future, an adjustment to the valuation allowance would be recorded in the period such determination is made. The need to maintain a valuation allowance against deferred tax assets may cause greater volatility in our effective tax rate.

Corporate Development Strategy

We expect to maintain a balanced growth strategy pursuing organic growth by maximizing the full potential of our existing businesses and, as appropriate, complementing our existing business with strategic acquisitions. During 2020, we completed the acquisitions of Kraus, Work Tools and SmarTap and signed an agreement to acquire majority interest in ESS.

In addition, we actively manage our portfolio of companies by divesting of those businesses that do not align with our long-term growth strategy. We will continue to review all of our businesses to determine which businesses, if any, may not align with our long-term growth strategy.

Liquidity and Capital Resources

Overview of Capital Structure

Historically, we have largely funded our growth through cash provided by our operations, the issuance of notes in the financial markets, bank borrowings and the issuance of our common stock, including issuances for certain mergers and acquisitions. Maintaining high levels of liquidity and focusing on cash generation are among our financial strategies. Our capital allocation strategy includes reinvesting in our business, balancing share repurchases with potential acquisitions and maintaining an appropriate dividend.

We had cash and cash investments of approximately $1.3 billion at December 31, 2020. Our cash and cash investments consist of overnight interest bearing money market demand accounts, time deposit accounts, and money market mutual funds containing government securities and treasury obligations. While we attempt to diversify these investments in a prudent manner to minimize risk, it is possible that future changes in the financial markets could affect the security or availability of these investments.

Of the $1.3 billion and $697 million of cash and cash investments we held at December 31, 2020 and 2019, respectively, $385 million and $297 million, respectively, was held in our foreign subsidiaries. If these funds were needed for our operations in the U.S., their repatriation into the U.S. would not result in significant additional U.S. income tax or foreign withholding tax, as we have recorded such taxes on substantially all undistributed foreign earnings, except for those that are legally restricted.

Our current ratio was 1.8 to 1 at both December 31, 2020 and 2019.

Our total debt as a percent of total capitalization was 87 percent and 102 percent at December 31, 2020 and 2019, respectively. Refer to Note L to the consolidated financial statements for additional information.

Senior Indebtedness

On September 18, 2020, we issued $300 million of 2.0% Notes due October 1, 2030 (the "2030 Notes") and received proceeds of $300 million, net of discount, for the issuance of the 2030 Notes. Also on September 18, 2020, we issued an incremental $100 million on our existing 4.5% Notes due May 15, 2047 (the "2047 Notes") and received proceeds of $119 million, including a premium, for the issuance of the 2047 Notes. The incremental $100 million formed a single series with the existing $300 million of 4.5% Notes due May 15, 2047. The 2030 Notes and 2047 Notes are senior indebtedness and are redeemable at our option at the applicable redemption price. On September 29, 2020, proceeds from the debt issuances were used to repay and early retire $400 million of our 3.5% Notes due April 1, 2021. In connection with this early retirement, we incurred a loss on debt extinguishment of $6 million, which was recorded as interest expense in our consolidated statement of operations.

On December 19, 2019, we redeemed and retired $201 million of our 7.125% Notes due March 15, 2020. In connection with this early retirement, we incurred a loss on debt extinguishment of $2 million, which was recorded as interest expense in our consolidated statement of operations.

On April 16, 2018, we repaid and retired all of our $114 million, 6.625% Notes on the scheduled repayment date.

Credit Agreement

On March 13, 2019, we entered into a credit agreement (the "Credit Agreement") with an aggregate commitment of $1.0 billion and a maturity date of March 13, 2024. Under the Credit Agreement, at our request and subject to certain conditions, we can increase the aggregate commitment up to an additional $500 million with the current lenders or new lenders. See Note L to the consolidated financial statements.

The Credit Agreement contains financial covenants requiring us to maintain (A) a net leverage ratio, as adjusted for certain items, not exceeding 4.0 to 1.0, and (B) a minimum interest coverage ratio, as adjusted for certain items, not less than 2.5 to 1.0. We were in compliance with all covenants and no borrowings were outstanding under our Credit Agreement at December 31, 2020.

Acquisitions

During 2020, we acquired substantially all of the net assets of Kraus and Work Tools, and all of the share capital of SmarTap for a combined $175 million of cash and $5 million of debt.

Additionally, we entered into an agreement to acquire a 75.1% equity interest in ESS for approximately €45 million ($55 million) subject to working capital and other adjustments. A cash payment was made to a third-party notary for $52 million on December 29, 2020 for the acquisition of this equity interest in advance of the transaction closing on January 4, 2021.

On March 9, 2018, we acquired substantially all of the net assets of the L.D. Kichler Co. ("Kichler"). The purchase price, net of $2 million cash acquired, consisted of $549 million paid with cash on hand.

Divestitures

During 2020, we completed the divestiture of our Cabinetry business for proceeds of $853 million, net of cash disposed.

During 2019, we completed the divestitures of our Milgard Windows and Doors business ("Milgard") and our UK Window Group business ("UKWG") for combined proceeds of $722 million.

Share Repurchases

In September 2019, our Board of Directors authorized the repurchase, for retirement, of up to $2.0 billion of shares of our common stock in open-market transactions or otherwise.

During 2020, we repurchased and retired 18.8 million shares of our common stock (including 0.4 million shares to offset the dilutive impact of restricted stock units granted during the year), for approximately $727 million. At December 31, 2020, we had $774 million remaining under the 2019 authorization. Our Board of Directors authorized the repurchase, for retirement, of up to $2.0 billion shares of our common stock in open-market transactions or otherwise, effective February 10, 2021, replacing the 2019 authorization.

During 2019, we repurchased and retired 20.1 million shares of our common stock (including 0.6 million shares to offset the dilutive impact of long-term stock awards granted in 2019), for approximately $896 million.

During 2018, we repurchased and retired 18.6 million shares of our common stock (including 0.7 million shares to offset the dilutive impact of long-term stock awards granted in 2018) for approximately $654 million.

Consistent with past practice and as part of our strategic initiative to drive shareholder value, we anticipate using approximately $800 million of cash for share repurchases (including shares which will be purchased to offset any dilution from restricted stock units granted as part of our compensation programs) in 2021.

Dividend to holder of Common Shares

In the third quarter of 2020, we increased our quarterly dividend to $0.14 per common share from $0.135 per common share.

As part of our capital allocation strategy and subject to declaration by our Board of Directors, we intend to increase the annual dividend to $0.94 per share, beginning in the second quarter of 2021.

Other Liquidity and Capital Resource Activities

As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including extending payment terms. We also facilitate a voluntary supply chain finance program (the "program") to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program.

All outstanding payments owed under the program are recorded within accounts payable in our consolidated balance sheets. The amounts owed to participating financial institutions under the program and included in accounts payable for our continuing operations were $45 million and $29 million at December 31, 2020 and 2019, respectively. We account for all payments made under the program as a reduction to our cash flows from operations and reported within our increase (decrease) in accounts payable and accrued liabilities, net, line within our consolidated statements of cash flows. The amounts settled through the program and paid to participating financial institutions were $146 million, $164 million, and $117 million for our continuing operations during the years ended December 31, 2020, 2019, and 2018, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions’ willingness to commit funds to, and participate in, the program. We do not believe such risk would have a material impact on our working capital or cash flows, as substantially all of our payments are made outside of the program.

We utilize derivative and hedging instruments to manage our exposure to currency fluctuations, primarily related to the European euro, British pound, the Chinese renminbi and the U.S. dollar; occasionally, we have also used derivative and hedging instruments to manage our exposure to commodity cost fluctuations, primarily zinc and copper, and interest rate fluctuations, primarily related to debt issuances. We review our hedging program, derivative positions and overall risk management on a regular basis. We currently do not have any derivative instruments for which we have designated hedge accounting.

Cash Flows

Significant sources and (uses) of cash in the past three years are summarized as follows, in millions:

			2020						2019						2018
Net cash from operating activities			$	953					$	833					$	1,032
Retirement of notes			(400)						(201)						(114)
Purchase of Company common stock			(727)						(896)						(654)
Cash dividends paid			(145)						(144)						(134)
Dividends paid to noncontrolling interest			(23)						(42)						(89)
Capital expenditures			(114)						(162)						(219)
Debt extinguishment costs			(5)						(2)						—
Acquisition of businesses, net of cash acquired			(227)						—						(549)
Issuance of notes, net of issuance costs			415						—						—
Employee withholding taxes paid on stock-based compensation			(25)						(23)						(42)
Proceeds from disposition of:
Businesses, net of cash disposed			870						722						—
Short-term bank deposits, net			—						—						108
Property and equipment			1						34						14
Financial investments			3						1						5
Payment of debt			(2)						(8)						(1)
Effect of exchange rate changes on cash and cash investments			31						14						4
Other, net			24						12						4
Cash increase (decrease)			$	629					$	138					$	(635)

Our working capital days were as follows:

			At December 31,
			2020						2019
Receivable days			54						54
Inventory days			72						67
Accounts Payable days			71						68
Working capital (receivables plus inventories, less accounts payable) as a percentage of net sales			15.6		%				15.7		%

Net cash provided by operations of $953 million consisted primarily of net income adjusted for certain non-cash items, including depreciation and amortization expense of $133 million and stock-based compensation expense, as well as changes in working capital amounts and employee withholding taxes paid on stock-based compensation, which is classified as a financing activity. These amounts were partially offset by the net gain on the sale of Cabinetry as well as contributions to our defined-benefit pension plans.

Net cash used for financing activities was $886 million, primarily due to $727 million for the repurchase and retirement of Company common stock (as part of our strategic initiative to drive shareholder value), $400 million for the early retirement of our 3.5% Notes due April 1, 2021, $145 million for the payment of cash dividends, $25 million for employee withholding taxes paid on stock-based compensation and $23 million for dividends paid to noncontrolling interests. These uses of cash were partially offset by the issuances of $300 million of 2.0% Notes due October 1, 2030 and an incremental $100 million on our existing 4.5% Notes due May 15, 2047 that was issued at a premium of $19 million, and $26 million of proceeds from the exercise of stock options.

Net cash provided by investing activities was $531 million, primarily driven by $870 million of proceeds from the sale of Cabinetry, net of cash disposed. These proceeds were partially offset by $175 million for the 2020 acquisitions, net of cash acquired, $114 million for capital expenditures and the $52 million advance payment for the acquisition of ESS that closed on January 4, 2021.

We continue to invest in our manufacturing and distribution operations of those businesses that align with our long-term growth strategy to increase our productivity, improve customer service and support product innovation. Capital expenditures for 2020 were $114 million, compared with $162 million for 2019 and $219 million for 2018. For 2021, capital expenditures, excluding any potential 2021 acquisitions, are expected to be approximately $150 million. Depreciation and amortization expense for 2020 totaled $133 million, compared with $159 million for 2019 and $156 million for 2018. For 2021, depreciation and amortization expense, excluding any potential 2021 acquisitions, is expected to be approximately $155 million. Amortization expense totaled $28 million in 2020, compared with $27 million and $24 million in 2019 and 2018, respectively.

Costs of environmental responsibilities and compliance with existing environmental laws and regulations have not had, nor do we expect them to have, a material effect on our capital expenditures, financial position or results of operations.

We believe that our present cash balance and cash flows from operations, and borrowing availability under our Credit Agreement are sufficient to fund our near-term working capital and other investment needs. We believe that our longer-term working capital and other general corporate requirements will be satisfied through cash flows from operations and, to the extent necessary, from bank borrowings and future financial market activities. However, due to the highly uncertain nature, severity and duration or resurgence of the COVID-19 pandemic and its impact on our customer, suppliers and employees, we are unable to fully estimate the extent of the impact it may have on our future financial condition.

Consolidated Results of Operations

We report our financial results in accordance with GAAP in the United States. However, we believe that certain non-GAAP performance measures and ratios, used in managing the business, may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, our reported results under GAAP.

The following discussion of consolidated results of operations compares 2020 and 2019. Descriptions of changes between 2019 and 2018 were excluded as there were no changes from what was disclosed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the December 31, 2019 Form 10-K.

Sales and Operations

Net sales for 2020 were $7.2 billion, which increased seven percent compared to 2019. Excluding the effect of currency translation, net sales increased seven percent. The following table reconciles reported net sales to net sales excluding the effect of currency translation, in millions:

			Year Ended December 31
			2020						2019
Net sales, as reported			$	7,188					$	6,707
Currency translation			(13)						—
Net sales, excluding the effect of currency translation			$	7,175					$	6,707

Net sales for 2020 increased seven percent primarily due to higher sales volume of our paints and other coating products, plumbing products, and to a lesser extent, builders' hardware, which, in aggregate, increased sales by eight percent. This increase was slightly offset by unfavorable net selling prices of paints and other coating products, which decreased sales by one percent.

Our gross profit margins were 36.0 percent, 35.4 percent and 35.0 percent in 2020, 2019 and 2018, respectively. The 2020 gross profit margin was positively impacted by increased sales volume and cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact. Such increases were slightly offset by unfavorable net selling prices and increased commodity costs, partially attributed to tariffs.

Selling, general and administrative expenses as a percent of sales were 18.0 percent in 2020 compared with 19.0 percent in 2019 and 18.8 percent in 2018. The decrease in selling, general, and administrative expenses as a percentage of sales in 2020 was primarily driven by cost containment activities including those actions taken to mitigate the COVID-19 pandemic impact and leverage of fixed expenses due primarily to increased sales volume. This improvement was partially offset by an increase in other expenses (such as salaries, legal costs and advertising).

The following table reconciles reported operating profit to operating profit, as adjusted to exclude certain items, dollars in millions:

			2020						2019						2018
Operating profit, as reported			$	1,295					$	1,088					$	1,077
Rationalization charges			11						13						9
Kichler inventory step up adjustment			—						—						40
Impairment charge for other intangible assets			—						9						—
Operating profit, as adjusted			$	1,306					$	1,110					$	1,126
Operating profit margins, as reported			18.0		%				16.2		%				16.2		%
Operating profit margins, as adjusted			18.2		%				16.5		%				16.9		%

Operating profit in 2020 was positively affected by increased sales volume and cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact. These positive impacts were partially offset by unfavorable net selling prices, increased commodity costs, partially attributed to tariffs, higher fixed expenses in our lighting business, and an increase in other expenses (such as salaries, legal cost and advertising).

Other Income (Expense), Net

Interest expense was $144 million, $159 million and $156 million in 2020, 2019 and 2018, respectively.

Other, net, for 2020 included $35 million of net periodic pension and post-retirement benefit cost and $10 million of realized foreign currency transaction losses, partially offset by $10 million of dividend income related to preferred stock of ACProducts Holding, Inc. and $9 million of income due from an escrow settlement.

Income Taxes

Our effective tax rate on income from continuing operations was 24 percent, 25 percent and 24 percent in 2020, 2019 and 2018, respectively. As a result of IRS guidance issued in the third quarter of 2020 that allows us to retroactively exclude certain high-taxed foreign income from the U.S. tax effects on Global Intangible Low-taxed Income ("GILTI") back to 2018, we lowered our normalized tax rate from 26 percent to 25 percent for 2020, 2019 and 2018.

Our effective tax rate in 2020 was lower than our normalized tax rate of 25 percent due primarily to a $5 million income tax benefit from a change in judgment regarding the realizability of certain deferred tax assets in our foreign jurisdictions, an additional $4 million tax benefit from stock-based compensation payments and a $6 million tax benefit due to an anticipated refund claim from the retroactive application of the exclusion of certain high-taxed foreign income from the U.S. tax effects on GILTI back to 2018.

Our effective tax rate in 2018 was lower than our normalized tax rate of 25 percent due primarily to an additional $14 million tax benefit from stock-based compensation payments, partially offset by a $6 million tax expense recognized on GILTI, prior to the retroactive exclusion of certain high-taxed foreign income as allowed under the recently issued IRS guidance in 2020.

Refer to Note S to the consolidated financial statements for additional information.

Income and Income Per Common Share from Continuing Operations (Attributable to Masco Corporation)

Income and diluted income per common share from continuing operations for 2020 were $810 million and $3.04 per common share, respectively. Income and diluted income per common share from continuing operations for 2019 were $639 million and $2.20 per common share, respectively. Income and diluted income per common share from continuing operations for 2018 were $636 million and $2.05 per common share, respectively.

Outlook for the Company

We continue to execute our strategies of leveraging our strong brand portfolio, industry-leading positions and the Masco Operating System, our methodology to drive growth and productivity, to create long-term shareholder value. We believe that our strong financial position and cash flow generation, together with our investments in our industry-leading branded building products, our continued focus on innovation and disciplined capital allocation, will allow us to drive long-term growth and create value for our shareholders. While we continue to remain uncertain regarding the short-term impact that the COVID-19 pandemic may have on our businesses, we remain confident in the fundamentals of our businesses and long-term strategy.

Business Segment and Geographic Area Results

The following table sets forth our net sales and operating profit information for our continuing operations by business segment and geographic area, dollars in millions.

																					Percent Change
			2020						2019						2018						2020 vs. 2019						2019 vs. 2018
Net Sales:
Plumbing Products			$	4,136					$	3,984					$	3,998					4		%				—		%
Decorative Architectural Products			3,052						2,723						2,656						12		%				3		%
Total			$	7,188					$	6,707					$	6,654					7		%				1		%
North America			$	5,805					$	5,328					$	5,208					9		%				2		%
International, principally Europe			1,383						1,379						1,446						—		%				(5)		%
Total			$	7,188					$	6,707					$	6,654					7		%				1		%

			2020						2019						2018
Operating Profit: (A)
Plumbing Products			$	806					$	708					$	715
Decorative Architectural Products			583						480						456
Total			$	1,389					$	1,188					$	1,171
North America			$	1,167					$	987					$	954
International, principally Europe			222						201						217
Total			1,389						1,188						1,171
General corporate expense, net			(94)						(100)						(94)
Total operating profit			$	1,295					$	1,088					$	1,077

**(A)**Before general corporate expense, net; refer to Note Q to the consolidated financial statements for additional information.

Business Segment Results Discussion

Changes in operating profit in the following Business Segment and Geographic Area Results discussion exclude general corporate expense, net, and compares each respective period to the same period of the immediately preceding year.

Description of changes to sales and operating profit between 2019 and 2018 for the Plumbing Products and Decorative Architectural Products segments, as well as geographic areas, were excluded as there were no changes from what was disclosed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the December 31, 2019 Form 10-K.

Plumbing Products

Sales

Net sales in the Plumbing Products segment increased four percent in 2020 due primarily to higher sales volume of North American operations, which increased sales by three percent. Favorable foreign currency translation further increased sales by one percent.

Operating Results

Operating profit in the Plumbing Products segment in 2020 was positively impacted by cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact, higher sales volume and favorable net selling prices. These positive impacts were partially offset by increased commodity costs, including tariffs, and an increase in other expenses (such as salaries and legal costs).

Decorative Architectural Products

Sales

Net sales in the Decorative Architectural Products segment increased 12 percent in 2020, due mostly to higher sales volume of paints and other coating products, and to a lesser extent, builders' hardware products. Such increases were slightly offset by unfavorable net selling prices of paints and other coating products.

Operating Results

Operating profit in the Decorative Architectural Products segment in 2020 benefited primarily from higher sales volume, as well as cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact, and decreased commodity costs. Additionally, operating profit was positively impacted by the non-recurrence of a 2019 non-cash impairment charge related to an other indefinite-lived intangible asset for a trademark associated with lighting products. These positive impacts were partially offset by unfavorable net selling prices, higher fixed expenses in our lighting business, and an increase in other expenses (such as salaries, legal costs and advertising).

Business Rationalizations and Other Initiatives

Over the last several years, we have taken several actions focused on the strategic rationalization of our businesses including business consolidations, plant closures, headcount reductions and other cost savings initiatives. In 2020, 2019 and 2018, we incurred net pre-tax costs and charges related to these initiatives of $11 million, $13 million, and $9 million, respectively.

We continue to realize the benefits of our business rationalizations and continuous improvement initiatives across our enterprise and expect to identify additional opportunities to improve our business operations.

During 2020, 2019 and 2018, our Plumbing Products segment incurred costs and charges of $7 million, $13 million and $9 million, respectively and our Decorative Architectural Products segment incurred costs and charges of $4 million in 2020. The 2020 costs primarily related to business and plant consolidation and severance costs in North America.

Geographic Area Results Discussion

North America

Sales

North American net sales in 2020 increased nine percent. Higher sales volume of paints and other coating products, plumbing products, and to a lesser extent, builders' hardware, in aggregate, increased sales by 10 percent. Such increases were slightly offset by unfavorable net selling prices of paints and other coating products, which decreased sales by one percent.

Operating Results

Operating profit from North American operations in 2020 was positively affected by higher sales volume, cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact and favorable sales mix of plumbing products. Additionally, operating profit was positively impacted by the non-recurrence of a 2019 non-cash impairment charge related to an other indefinite-lived intangible asset for a trademark associated with lighting products. These positive impacts were partially offset by unfavorable net selling prices and increased commodity costs, primarily attributable to tariffs. Additionally, operating profit was adversely impacted by higher fixed expenses in our lighting business, and an increase in other expenses (such as salaries, legal costs and advertising).

International, Principally Europe

Sales

Net sales from International operations in 2020 were flat. In local currencies (including sales in foreign currencies outside their respective functional currencies), net sales decreased one percent due to unfavorable sales mix of plumbing products that was partially offset by favorable net selling prices of plumbing products.

Operating Results

Operating profit from International operations in 2020 was positively impacted by cost savings initiatives, including actions taken to mitigate the COVID-19 pandemic impact, and favorable net selling prices. These positive impacts were partially offset by unfavorable sales mix.

Other Matters

Commitments and Contingencies

Litigation

Information regarding our legal proceedings is set forth in Note U to the consolidated financial statements, which is incorporated herein by reference.

Other Commitments

We enter into contracts, which include reasonable and customary indemnifications that are standard for the industries in which we operate. Such indemnifications include claims made against builders by homeowners for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide reasonable and customary indemnifications. We have never had to pay a material amount related to these indemnifications, and we evaluate the probability that amounts may be incurred and record an estimated liability when probable and reasonably estimable.

Recently Adopted and Issued Accounting Pronouncements

Refer to Note A to the consolidated financial statements for discussion of recently adopted and issued accounting pronouncements, which is incorporated herein by reference.

Contractual Obligations

The following table provides payment obligations related to current contracts at December 31, 2020, in millions:

			Payments Due by Period
			2021						2022-2023						2024-2025						Beyond 2025						Other						Total
Debt (A)			$	3					$	337					$	506					$	1,948					$	—					$	2,794
Interest (A)			130						231						209						614						—						1,184
Operating leases			46						64						36						89						—						235
Currently payable income taxes			16						—						—						—						—						16
Private equity funds (B)			—						—						—						—						4						4
Purchase commitments (C)			307						—						—						—						—						307
Uncertain tax positions, including interest and penalties (D)			—						—						—						—						84						84
Total			$	502					$	632					$	751					$	2,651					$	88					$	4,624

______________________________

**(A)**We assume that all debt would be held to maturity. Amounts include finance lease obligations.

**(B)**There is no schedule for the capital commitments to the private equity funds; accordingly, we are unable to make a reasonable estimate as to when capital commitments may be paid.

**(C)**Excludes contracts that do not require volume commitments and open or pending purchase orders.

**(D)**Due to the high degree of uncertainty regarding the timing of future cash outflows associated with uncertain tax positions, we are unable to make a reasonable estimate for the year in which cash settlements may occur with applicable tax authorities.

Refer to Note N to the consolidated financial statements for defined-benefit pension plan obligations.